SECURE 2.0 is Here: Major Retirement Plan-Related Changes

On December 29, 2022, President Biden signed into law the “SECURE 2.0 Act of 2022,” which includes nearly 100 sections that expand on retirement laws and encourage (and, in some cases, require) additional retirement savings.  SECURE 2.0 comes right on the heels of the SECURE Act of 2019, which, at the time, was the most significant piece of retirement-related legislation since ERISA in 1974.  SECURE 2.0 makes even greater changes.

While the legislation covers many topics (including IRAs, SEPs, SIMPLE 401(k) plans, ESOPs, investments, disclosures, incentives for small employers, and “starter 401(k) plans”), we’ve highlighted the key issues of which mid-sized employers and plan sponsors should be aware:

• Required Auto-Enrollment: Effective January 1, 2025, all newly established 401(k) and 403(b) plans must include an automatic-enrollment feature. As background, auto-enrollment features enroll eligible employees in the plan at an automatic elective deferral rate (typically, 1-3%).

SECURE 2.0 now requires newly established plans to include an automatic elective deferral rate of 3%, increased by 1% each year, until 10% deferrals are reached.  Participants may affirmatively opt out of the auto-enrollment or may elect a different deferral rate.  The required auto-enrollment feature does not apply to church plans or governmental plans, and all current 401(k) and 403(b) plans are grandfathered.

This change comes as no surprise: Congress has been steadily encouraging auto-enrollment features in 401(k) and 403(b) plans to generate greater private retirement savings.

• Increased RMD Age (Again): The SECURE Act of 2019 increased the required minimum distribution age from 70½ to 72. SECURE 2.0 further increases the RMD age to 73 for individuals who attain age 72 after December 31, 2022, and again increases the age to 75 for individuals who attain age 74 after December 31, 2032.

• No RMDs for Roth Accounts: Effective January 1, 2024, SECURE 2.0 clarifies that pre-death required minimum distributions are not required from any Roth account (including in an employer-sponsored retirement plan).

• Increased Catch-Up Contribution Limits: Under current law, employees who have attained age 50 may make additional contributions (up to $6,500 in 2022, as adjusted annually for inflation) to a retirement plan in excess of the standard limits. Effective January 1, 2025, SECURE 2.0 increases these limits further for individuals who have reached ages 60, 61, 62, and 63, to the greater of $10,000 or 150% of the regular catch-up contribution limit.  The Treasury Department may increase this maximum in the future for inflation.

• Catch-Up Contributions Must be Roth. Beginning January 1, 2024, all catch-up contributions made to a qualified retirement plan must be given Roth[2] treatment, except for employees with compensation of $145,000 or less.  

• Optional Roth Treatment for Employer Contributions: Effective immediately, SECURE 2.0 allows a defined contribution plan to be amended to grant participants the option to treat employer matching contributions as Roth.

• Student Loan Repayments as Elective Deferrals: Beginning for plan years after December 31, 2023, SECURE 2.0 explicitly allows employers to make matching contributions under a 401(k), 403(b), or governmental 457(b) plan for employees who make student loan repayments. The matching contributions may be based on those repayment amounts instead of the employee’s elective deferral contributions.  This legislative change is consistent with the IRS’s position from a private letter ruling in 2018 (click here for a summary of such ruling) and allows employees who are unable to make elective deferral contributions due to severe student loan debt to nonetheless save for retirement.

• Increased Coverage of Long-Term, Part-Time Employees: The SECURE Act required “long-term, part-time” employees to be eligible to make elective deferral contributions to a 401(k) plan. Beginning January 1, 2025, SECURE 2.0 expands the definition of “long-term, part-time” employees to include employees who have provided at least 500 hours of service in a plan year for two consecutive years (instead of three) to be eligible to make elective deferral contributions.  It also requires elective deferral eligibility for long-term, part-time employees in 403(b) plans beginning January 1, 2025.

• Cash Incentives to Participate: Effective immediately, employers may offer employees small immediate incentives (such as a gift card or cash) as an incentive to enroll in the retirement plan, to help boost participation. These incentives cannot be paid with plan assets.

• Increased Limit for Mandatory Distributions: Currently, employers may automatically rollover a former employee’s account into an IRA if the account balance is between $1,000 and $5,000. SECURE 2.0 increases the limit to $7,000, effective for distributions after December 31, 2023.

• Emergency Withdrawals: Except in limited circumstances, employees are subject to a 10% early withdrawal penalty tax for withdrawing amounts from their retirement accounts before retiring. Effective for distributions after December 31, 2023, SECURE 2.0 allows an employee to take up to $1,000 of “emergency withdrawals” in a calendar year without incurring such early withdrawal penalty.  Employees may repay such amounts to the plan over 3 years.

• Withdrawals for Domestic Abuse Survivors: Beginning for distributions after December 31, 2023, domestic abuse survivors may withdraw up to the lesser of $10,000 (indexed annually for inflation) or 50% of their account balance without incurring the 10% early withdrawal penalty tax. The participant may repay the withdrawn money over three years and will be refunded for any income taxes on the amount repaid.

• Self-Certification for Hardship Withdrawals: Effective immediately, employers may rely on an employee’s self-certification that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal under the plan.

• Update to Deferral Elections in Governmental 457(b) Plans: Under current law, participants in a 457(b) plan must update their elective deferral rate in the month before the month in which the updated deferral will be made. Effective immediately, SECURE 2.0 allows, for governmental 457(b) plans, updated deferral rates to be requested any time before the deferral goes in to effect.  Interestingly, this update does not apply to deferral elections in 457(b) plans sponsored by non-governmental (i.e., tax-exempt) entities.

• 403(b) Multiple Employer Plans: Effective January 1, 2023, SECURE 2.0 now allows a 403(b) plan to be set up as a multiple employer plan (“MEP”). Previously, only qualified plans could be established with multiple unrelated employers.  MEPs, although maintained by multiple unrelated employers, are treated as maintained by a single employer, which presents many benefits from an ERISA standpoint (including only one Form 5500 filing).  MEPs allow smaller companies to “pool” their resources together to offer greater benefits to their employees.

• Expanded EPCRS: SECURE 2.0 expands the IRS’s Employee Plans Compliance Resolution System (“EPCRS”) to allow self-correction of additional types of errors, and to add safe harbor correction procedures for elective deferral failures. It also grants fiduciaries the flexibility to not have to recoup overpayments mistakenly made to retirees.  This is an important change as oftentimes, overpayments are not discovered until months (sometimes years) have passed since the unsuspecting retiree received the distribution and many times, the overpayment has already been spent, forcing the employer to act as a creditor to a retiree living on a fixed income.

Plans must be amended before the last day of the plan year beginning on or after January 1, 2025 (2027, for governmental plans), to incorporate these changes.  Plans should, however, operate in accordance with the amendments as of the effective date of such change.  So while many of the changes are not effective before 2024, plan sponsors and employers may want to immediately begin preparing to implement these changes.

[2] Meaning contributions are made on an after-tax basis.